This is from http://www.moneyandmarkets.com/issues.aspx?Closer-to-a-Financial-Meltdown-1558
Scenario A
The Greatest Federal
Bailouts of All Time
Create Rampant Inflation
In this scenario, Fed Chairman Ben Bernanke continues to do precisely what yesterday's New York Times says he has already been doing since last year:
Tossing out the rule book of monetary policy,
Abandoning his prior concerns about the moral hazard of financial bailouts,
Inventing new policy on the fly, and ...
Creating history's greatest and most radical money-pumping machines $100 billion per month in loans to banks in exchange for shaky collateral ... an extra $100 billion in money infusions announced on March 7 ... an additional $200 billion in loans to brokers in exchange for sinking mortgage bonds ... and more.
Ironically, though, in this scenario, despite all of the money pumping already in the pipeline, the loudest voices will be those who cry out for even more.
They will be voices like ...
Citigroup's economists who bemoaned on Friday "the self-feeding downturn now in place" and who forecast a Fed rate cut tomorrow of a full percentage point. Or ...
Merrill Lynch's chief economist who argued that the Fed's policy so far "does not address underlying credit problems, does not materially improve the solvency of the institutions exposed to assets under stress, and does nothing to put a floor under home prices." The implication: Bernanke must do much more.
But Gretchen Morgenson, also writing in yesterday's New York Times, leaves little doubt as to the ultimate price to be paid for Bernanke's new follies:
"What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above?
"Stick around, because we'll soon find out. And it's not going to be pretty."
No. It's not.
That's why this scenario the greatest federal bailout of all time inevitably comes with the most rampant inflation we've seen in our lifetime. And it has already begun.
Scenario B
Financial Meltdown
This is the scenario that nearly everyone on Wall Street is thinking about ... but virtually no one dares talk about. They can't imagine what it would be like. Or they fear that the mere discussion of its possibility will bring it closer to a probability.
But nothing could be further from the truth.
When unreasonable people conjure up future events with no basis in fact, it's never taken seriously enough to notably alter the script of history. By the same token, when there is concrete evidence of a future disaster, realistically exploring its ultimate consequences can only help the actors prepare for the future.
I'm talking about the possibility of a wholesale market shutdown.
On a much smaller scale, you've already seen bits and pieces of something akin to this phenomenon. You've seen stocks stop trading in the wake or in anticipation of major news. You've seen futures stop trading when a particular market rises or falls by the daily allowable limit.
And on a broader scale, history has seen the nation's banks declare an extended holiday, the nation's stock exchanges close down for a week or more, and a particular industry shut down for extended strikes.
Now, put those together and try to visualize a similar situation on a national scale.
Why? Because the entire country runs on credit. But in a financial meltdown, the essence of credit trust is destroyed. Therefore, the country cannot run. It must shut down temporarily while the authorities sort out the mess and come up with a plan that can restore that trust.
Is this likely? It's too soon to say. But there's one thing we do know:
It was precisely to avoid such a scenario that Mr. Bernanke has abandoned the Fed's rules and loaned money to banks in exchange for bad collateral ... trashed the rules again to loan even more to brokers ... and thrown the entire Fed rule book into the Potomac by bailing out Bear Stearns on Friday.
And that's why Mr. Bernanke has vowed to continue doing everything in his power to prevent more dominoes from tumbling.
The ultimate question is: Is his power enough?
Scenario A
The Greatest Federal
Bailouts of All Time
Create Rampant Inflation
In this scenario, Fed Chairman Ben Bernanke continues to do precisely what yesterday's New York Times says he has already been doing since last year:
Tossing out the rule book of monetary policy,
Abandoning his prior concerns about the moral hazard of financial bailouts,
Inventing new policy on the fly, and ...
Creating history's greatest and most radical money-pumping machines $100 billion per month in loans to banks in exchange for shaky collateral ... an extra $100 billion in money infusions announced on March 7 ... an additional $200 billion in loans to brokers in exchange for sinking mortgage bonds ... and more.
Ironically, though, in this scenario, despite all of the money pumping already in the pipeline, the loudest voices will be those who cry out for even more.
They will be voices like ...
Citigroup's economists who bemoaned on Friday "the self-feeding downturn now in place" and who forecast a Fed rate cut tomorrow of a full percentage point. Or ...
Merrill Lynch's chief economist who argued that the Fed's policy so far "does not address underlying credit problems, does not materially improve the solvency of the institutions exposed to assets under stress, and does nothing to put a floor under home prices." The implication: Bernanke must do much more.
But Gretchen Morgenson, also writing in yesterday's New York Times, leaves little doubt as to the ultimate price to be paid for Bernanke's new follies:
"What are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms for the past year? Or all of the above?
"Stick around, because we'll soon find out. And it's not going to be pretty."
No. It's not.
That's why this scenario the greatest federal bailout of all time inevitably comes with the most rampant inflation we've seen in our lifetime. And it has already begun.
Scenario B
Financial Meltdown
This is the scenario that nearly everyone on Wall Street is thinking about ... but virtually no one dares talk about. They can't imagine what it would be like. Or they fear that the mere discussion of its possibility will bring it closer to a probability.
But nothing could be further from the truth.
When unreasonable people conjure up future events with no basis in fact, it's never taken seriously enough to notably alter the script of history. By the same token, when there is concrete evidence of a future disaster, realistically exploring its ultimate consequences can only help the actors prepare for the future.
I'm talking about the possibility of a wholesale market shutdown.
On a much smaller scale, you've already seen bits and pieces of something akin to this phenomenon. You've seen stocks stop trading in the wake or in anticipation of major news. You've seen futures stop trading when a particular market rises or falls by the daily allowable limit.
And on a broader scale, history has seen the nation's banks declare an extended holiday, the nation's stock exchanges close down for a week or more, and a particular industry shut down for extended strikes.
Now, put those together and try to visualize a similar situation on a national scale.
Why? Because the entire country runs on credit. But in a financial meltdown, the essence of credit trust is destroyed. Therefore, the country cannot run. It must shut down temporarily while the authorities sort out the mess and come up with a plan that can restore that trust.
Is this likely? It's too soon to say. But there's one thing we do know:
It was precisely to avoid such a scenario that Mr. Bernanke has abandoned the Fed's rules and loaned money to banks in exchange for bad collateral ... trashed the rules again to loan even more to brokers ... and thrown the entire Fed rule book into the Potomac by bailing out Bear Stearns on Friday.
And that's why Mr. Bernanke has vowed to continue doing everything in his power to prevent more dominoes from tumbling.
The ultimate question is: Is his power enough?
